Friday, September 07, 2007

And, In Today's Mortgage Meltdown News: Investor Blame and Black Neighborhood Destruction

Numbers about 1Q and 2Q 2007 foreclosure activity (BEFORE the markets started melting down in July and August, mind you) were released by the Mortgage Bankers' Association Wednesday. They should frighten anyone who understands anything about the impact of foreclosure activity on not only home values, but on overall access to credit -- the engine that that everyone admits has been fueling Dubbya's so-called "robust economy" in a country where many contend that consumer spending represents 2/3 of the GDP.

They are frightening because, as of the end of June, 2007, in addition to the 0.65% of mortgages in the foreclosure process, 5.12% of the mortgages which were not in foreclosure were "delinquent", i.e. the mortgage payments were at least 30 days behind. 

That means that, right now, 1 in every 20 home mortgages in the United States is behind and, thus, at potential risk.

1 in 20.

Driving that figure is the devilish detail that everyone from the government to the mainstream media keeps clinging to like a life preserver without grasping the horrific big picture of "1 in 20":  the percentage of subprime loans that are currently delinquent, which right now is at 14.82%.  That number is huge, but I can see folks out there shrugging since, after all, these were the folks who "really couldn't afford" a home.  (I can literally see them, having read the litany of "its their own fault" many times whenever prescient folks tried to blog about this crisis, both before it happened and now.)

Even if we assume that myth about "it's their own fault" is true for the subprime borrowers for the sake of argument, setting aside all the urban legends about who gets placed in subprime loans and why that underlie such a conclusion, how does one explain the fact that right now 2.73% of prime mortgages -- 1 in every 36 -- are delinquent right now, too? (Up from 2.54% at the beginning of the year.) 

I know how I explain it.  I explain it by looking yet again at the source of the problem which the Fed and Wall Street and frankly most folks left and right keep wanting to avoid blaming:  the investment markets.

And the more I look, the angrier I get.
What makes me the angriest is that the market-makers and the feds know the truth about why this situation has occurred, yet the media keeps trying to blame it all on "subprime borrowers" (with the implication that these folks are where the irresponsibility originated.)  Yet as FRB Chairman Ben Bernacke quite candidly admitted in May:

Whereas once most lenders held mortgages on their books until the loans were repaid, regulatory changes and other developments have permitted lenders to more easily sell mortgages to financial intermediaries, who in turn pool mortgages and sell the cash flows as structured securities. The growth of the secondary market has thus given mortgage lenders greater access to the capital markets, lowered transaction costs, and spread risk more broadly, thereby increasing the supply of mortgage credit to all types of households.

These factors laid the groundwork for an expansion of higher-risk mortgage lending over the past fifteen years or so. . . 

The practices of some mortgage originators have also contributed to the problems in the subprime sector.  As the underlying pace of mortgage originations began to slow, but with investor demand for securities with high yields still strong, some lenders evidently loosened underwriting standards.  So-called risk-layering--combining weak borrower credit histories with other risk factors, such as incomplete income documentation or very high cumulative loan-to-value ratios--became more common.  These looser standards were likely an important source of the pronounced rise in "early payment defaults"--defaults occurring within a few months of origination--among subprime ARMs, especially those originated in 2006.

Although the development of the secondary market has had great benefits for mortgage-market participants, as I noted earlier, in this episode the practice of selling mortgages to investors may have contributed to the weakening of underwriting standards. . . In addition, incentive structures that tied originator revenue to the number of loans closed made increasing loan volume, rather than ensuring quality, the objective of some lenders. . . . Intense competition for subprime mortgage business--in part the result of the excess capacity in the lending industry . . .may also have led to a weakening of standards.  In sum, some misalignment of incentives, together with a highly competitive lending environment and, perhaps, the fact that industry experience with subprime mortgage lending is relatively short, likely compromised the quality of underwriting.

The accuracy of much of the information on which the underwriting was based is also open to question.  Mortgage applications with little documentation were vulnerable to misrepresentation or overestimation of repayment capacity by both lenders and borrowers. . .Some borrowers may have been misled about the feasibility of paying back their mortgages, and others may simply have not understood the sometimes complex terms of the contracts they signed.

Despite this candor in the ivory tower about the huge role that investment strategies in the securities markets played in the current meltdown, both the MSM and pundits perhaps well-meaning but truly ignorant about what was happening continue to trumpet the false notion that homeowners were the ones primarily irresponsible, instead of victimized by a greed-fueled money-making engine -- the secondary mortgage-backed securities market -- that cast its fishing line far and wide, with increasingly attractive bait (the "American Dream" of homeownership, already seductive as a cultural narrative but tarted up with a predatory readiness on the part of lenders to originate mortgages with high debt-to-income ratios, high debt-to-value ratios, zero-interest and negatively amortizing notes, and reduced credit and income worthiness scrutiny; whatever it took to close and thus provide more mortgage paper for reinvestment in the secondary market) for the primary purpose of increasing the pool of mortgages available for sale in the secondary market, where it is all about money, and nothing but money.  Excess money, which can thus be played with -- something that most families in our country today know nothing about, since they have been in a negative-savings posture now for nearly three years.  Something that had not happened since the Great Depression.

I know that there are those who might be asking why I spend so much time discussing financial/mortgage issues and what it could possibly have to do with Black people.  My reason is obvious, although it seems not too many Black bloggers are writing about it:  the borrowers disproportionately forced into the subprime market, with the often-resulting predatory mortgage underwriting, lending and servicing practices that arose to sustain the feeding of investment paper to the secondary markets were disproportionately Black homeowners  The Center for Responsible Lending confirmed in 2004 and has reconfirmed several times since what those of us on the ground already knew:  African-American homes (and neighborhoods!) are at risk.  Over 50% of all African-Americans, and 42% of Latino borrowers, who got mortgages were shoveled into subprime loans, quite often regardless of income level or creditworthiness.

It is that market/credit discrimination which led to situations such as that which existed in New Orleans, where at the time of Katrina, 26% of all homeowners held subprime mortgages and, today, 50% of the mortgages held by African-Americans are subprime.  The servicers of those mortgages were not exactly sympathetic when Katrina hit, requiring the intervention and public shaming of public interest groups such as ACORN before they would offer the same forbearance terms that were automatically offered to the borrowers of prime loans.  Even then, forbearance came with all sorts of fun "exploding time bombs" built in, such as a homeowner being required to make the payments deferred during the forbearance period all at once to avoid foreclosure, amongst others.

(Now you know another reason why so many Katrina displacees can't Return Home.  A reason that has gotten almost NO media attention.)

But it isn't just New Orleans, a formerly majority-Black city missed by a natural hurricane only to now find itself at risk of being eaten away by a financial one in a couple of years as all those 2/28s and 3/27s start resetting.  Other Black majority cities are too on the cusp of the Eve of Destruction thanks to the mortgage crisis, too.  Just as we were historically shut out of the credit and mortgage markets due to discriminatory investment practices, let in comparatively recently only through investor greed, we are now being shut out again and our non-white majority communities face disproportionate risk of being decimated by the current mortgage debacle. 

Our cities, like the 82% Black city of Detroit, Michigan.

Our suburbs, like the 51% Black city of Cleveland, Ohio.

Our newest regional giants, like the 61% Black city of Atlanta, Georgia.

And our Black urban enclaves, like the approximately 80% Black neighborhood of Bedford-Stuvesant/East New York and the 72% Black neighborhood of Jamaica/Hollis in New York City, New York.

Beginning to see a trend, yet?

I have always believed that at least one reason that most folks didn't care about well-known predatory lending and mortgage servicing practices involved race, and the fact that heretofore, many of the victims associated publicly by the MSM with mortgage problems were non-white, most often Black.  In light of that, a more cynical, heartless, person than I am would be grateful that at least now the problem has gotten so bad that white folks too are beginning to suffer, since it was only when that started happening that folks finally started talking about legislative solutions to try and ensure that "mainstream" homeowners, having been hooked and reeled into the system by the promise of the "American Dream" for motives that had little to do with altruism and everything to do with the greed and excess of the investor and servicer classes, do not suffer from this crisis -- whose making has been largely ignoreda and pooh-poohed for a long time.

So what's a person to do? What's a neighborhood to do, when you have stories such as that which ran in Wednesday's NY Times called Can the Mortgage Crisis Swallow a Town? (Yes, it sure as hell can.)

I don't have all the solutions, or even some of the solutions.  But I do know that the worst possible thing is for the credit markets to shut out everyone but perfect borrowers with perfect-sized Fannie and Freddie guaranty-eligible loans right now, which is being increasingly reported. With discrimination still running rampant in the credit markets already, such a contraction is the LAST thing that Black and Latino homeowners and their neighborhoods in crisis need.  All that a return to traditional underwriting in the midst of this crisis does is ensure that most of the victims of this crisis, particularly those of color, will have no fair chance at escape.

And the cynical suspicious person in me wonders how long it will be before all these neighborhoods will be gentrified, homes formerly raising Black children in security now belonging to enterprising folks who just happen to have disposible income (which is not something that most families of color have, or anyone else too much these days) and jump on a "good deal", the bones of the formerly non-white communities being decimated by foreclosure picked clean as if they had been had at by vultures, after they die.  Since they are, inarguably, dying.

(No, for the record, I am NOT objective about this issue.)


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